How to check on the health of your bank: Look up ratings online

Bank safety

A rising tide of bank failures is raising questions about the health of banks

February 20, 2010|By DoreenHemlock, South Florida Sun-Sentinel

A growing tide of bank failures is raising consumer questions about the health of banks.

For depositors, the good news is you're protected. The Federal Deposit Insurance Corp. insures every depositor for at least $250,000 at each insured bank. People with more than $250,000 can split their cash among insured banks and remain fully protected. The FDIC insures more than 8,000 banks nationwide.

Even when regulators take over a failed bank and sell it, customers hardly notice. Banks typically are closed Friday after work and reopen Monday with new ownership and business conducted as usual.

"No depositor has lost a penny in insured deposits since the FDIC was created in 1934," said agency spokesman David Barr, calling bank failures and sales typically "a seamless transition" for depositors.

Still, bank failures may cause some inconveniences, such as a transfer to new computer systems or branch closings. And investors surely want to keep tabs on the banks in which they hold stock or may purchase shares.

There's ample reason for questions. The FDIC said 140 federally insured banks failed last year, the highest total since 1992, and the agency expects even more failures this year. The banks are failing for two main reasons: Homeowners and businesses are falling behind on paying their real estate loans in the weak economy. And as revenues drop, some banks don't have enough cash to put aside as reserves.

Here are some resources to help consumers find out about banks and their health:

Check bank ratings: Probably the simplest way to monitor bank soundness is to look up bank ratings. A host of private companies rate banks and offer the ratings free online and easily searchable.

Ratings companies include BauerFinancial of Coral Gables, which provides updates at least four times a year using data that the banks provide to U.S. regulators. BauerFinancial assigns a star rating to each bank, with five stars the top rating and zero stars the lowest. Institutions rated 2-stars or less are placed on its "Troubled and Problematic" report. Check http://www.bauerfinancial.com.

Also useful is North Palm Beach-based Bankrate.com, a personal finance website with wide-ranging data including quarterly bank ratings. Bankrate.com ratings compare banks to their peers. They use five stars as the top rank and one star as the lowest. Check http://www.bankrate.com.

Bank ratings generally focus on measurements in four key areas, according to Greg McBride, senior financial analyst at Bankrate.com.

Perhaps most important now is measuring "asset quality," or what McBride calls: "The bank equivalent of "You are what you eat." You look at the loans made and see if they're good or bad," he said.

Also crucial is measuring "capitalization," or how much the owners own and how much the creditors own. That's vital, because if borrowers don't repay the loans and the bank's revenues drop, the bank may not have enough of a "capital cushion" — or enough of its own money — to absorb the losses, said McBride.

Ratings also measure "earnings" or profits and losses, and they look at "liquidity," or how much cash is readily available, said Bankrate.com.

Check government sources: Government websites also offer ample data on banks.

The FDIC site, for example, provides a list of insured banks and spells out rules for coverage on depositors with joint and multiple accounts topping $250,000 in the same insured bank. Check http://www.fdic.gov.

The site also offers easy access to the financial statements that banks file quarterly. You can comb through data to check, for example, if a bank's loan loss reserves have changed.

The FDIC also lists bank failures, with names often added Friday evenings. That's when regulators tend to take over failing banks, so they can use the weekend to transfer ownership and prepare to re-open Monday as usual. The list links to details on each failed bank, such as assets and new owners.

Bank regulators also offer information on their sites about enforcement actions. Check the Federal Reserve site at http://www.federalreserve.gov, for example, to see a Jan. 4 directive requiring "prompt corrective action" by Boca Raton-based Sun American Bank for being undercapitalized.

Consider the Texas ratio: For people adept with numbers, try computing the Texas ratio. This formula basically takes the bad things on the books and divides that by the good things. The smaller the result, the better. A ratio of 1:1 is considered a warning of possible problems, according to analysts at RBC Capital Markets who developed the formula.

The ratio helped identify possible problems in Texas banks in the 1980s. It can apply now too, provided banks are disclosing the full extent of their bad loans.

To compute the ratio, take the amount of non-performing assets and loans, plus loans not paid in more than 90 days. Divide that by the tangible capital equity plus the loan loss reserve. The answer is an indicator of possible trouble but does not necessarily predict problems, analysts warn.